Questions
Single choice
Make or buy? Will & Co. manufactures speed boats. Currently, the company manufactures its own engine for the boats. Cost to make one engine: Direct materials $25.00 per unit Direct labour $40.00 per unit Variable overhead $15.00 per unit Fixed overhead $20.00 per unit Will & Co. can buy the engine at a cost of $85 each. If Will & Co. outsource the engine they will not save any money on the fixed overhead (these costs will still have to be paid). Will & Co. currently makes 1000 boats per year so will need to make or buy 1,000 engines. If Will & Co. accepts the offer, what will be the short-term impact on the total net profit?
Options
A.Net profit will decrease by $5,000.
B.Net profit will decrease by $85,000.
C.Net profit will increase by $15,000.
D.Net profit will increase by $20,000.
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Step-by-Step Analysis
We need to compare the total cost of making the engines in-house vs buying them, for 1,000 engines.
First, calculate the per-unit costs when Will & Co. makes an engine:
- Direct materials: 25
- Direct labour: 40
- Variable overhead: 15
- Fixed overhead: 20
Total cost to make per engine = 25 + 40 + 15 + 20 = 100
Thus, total annual cost (if all 1,000 engines are made) = 100 × 1,000 = 100,000.
Next, calculate the ......Login to view full explanationLog in for full answers
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